Annuities and their role in our investing plan

[sgeeeee]

Try to see another point of view: it's not about you, SG.

Is it about CFB? He really needs to get the credit for this somehow.

 

[cute fuzzy bunny]

Its amazing how much you can accomplish when you dont care who gets the credit.

I'm sure the moderators now have enjoyed the full experience of what happens when one suggests that a mortgage may not always be ones best idea, or that in ones old age, multiplying something by 25 and then counting on the government and an insurance agency to come through for you might be something worth considering a second time.

If that doesnt quite cut it, try checking in with Harry Whittington.

(hey, hell hath no fury like a bunny scorned...)

 

[Cut-Throat]

or that in ones old age, multiplying something by 25 and then counting on the government and an insurance agency to come through for you might be something worth considering a second time.

Well, I guess that only works until you hit age 70. Then all you need to do is Mulitply by 13.3 to get that ultra safe 7.5% withdrawal rate!

 

[janeeyre]

My husband and I are considering placing a portion of our funds in a Charitable Fund Annuity. They have intrigued me for a while because I don't see a downside to them. I am definitely not an investing guru so I have always acquiesced to financial experts. Does anyone have aCFA? Is there a reason to avoid them?

 

[ERD50]

My husband and I are considering placing a portion of our funds in a Charitable Fund Annuity. They have intrigued me for a while because I don't see a downside to them. I am definitely not an investing guru so I have always acquiesced to financial experts. Does anyone have aCFA? Is there a reason to avoid them?

I had looked into these a while back. My observations:

A) You do need to be very concerned about the solvency of the charity - what guarantee do you have they can pay many years from now? It should at least be insured, I would think.

B) It appeared to me, that you should only do this with money that you earmarked for charitable donations anyway. It did not seem to make sense to me on a pure numbers basis. But, it *might* be a good way to make the contribution, and get the income stream.

C) IIRC, the tax situation is not straightforward (is it ever?). The 'donation' portion can be tax deductible, but some of the income is from earnings, and that gets taxed. Or it is figured as part of the original donation, and only that % is tax deductible - something like that.

IMO, bottom line, you need to do a lot of homework to see if this makes sense for you. And, I would stress, it really should be for money you planned to give to charity anyhow. The charities will often make it sound super-sweet, but, compare them with just taking a 4% SWR and leaving any remaining balance to the charity.

-ERD50

 

[Nords]

Does anyone have aCFA? Is there a reason to avoid them?

Our dear ol' alma mater thinks they're a wonderful idea (probably for the alma mater). Many full-page ads in the alumni magazine.

But, from that same magazine, I've noticed that just about everyone who's invested with them is dead or dying!

I'm a bit paranoid about giving a chunk of change to someone who's obligated to keep paying it back to me unless I'm dead.

 

[Empty Pockets]

Back to the original question. I notice a lot of people speak highly of pensions. I'm fairly new here, but I can't remember anyone ever talking down an employer sponsored pension for life.

I've been self employed since I was 19. I knew I wouldn't have an employer sponsored plan of any kind, and I wasn't about to rely on social security.

Several years ago I took out a Variable Annuity, and I invest a good percentage of my retirement money this direction (after maxing out Roth's). Today, it has over $400,000 in it, inside a well planned mix of equity funds. It rebalances quarterly and I don't care what kind of gains it has in a given year, I don't get a 1099. Any additional fees it may have, and I know it has some, don't seem to be noticable in the overall performance when I compare it to my taxable investment accounts. I'm told one of the reasons is that the fund managers don't need to be concerned about generating taxable income so it allows them greater freedom in managing the funds. I had this through the down markets earlier this decade, and it was somewhat reassuring to see the guaranteed death benefit when the equity portions were way down. I kept on investing in equities and the growth over the past three years has been outstanding. The net return is comparable to my other funds held in taxable accounts.

I know there are more expenses involved. But there are benefits too. You don't have to actually collect on one of the benefits for it to provide value to you. I'm 100% equities and I'm quite comfortable with this allocation due to the safety nets and guarantees built into the contract. I took out this Variable Annuity 9 years ago when I was 32. I plan on funding it til I'm 50. Sure there are surrender fees (which I'm past) and I can't touch the money for many years, but these funds are targeted for retirement anyway. I've got cash set aside for emergencies. I seldom hear people discourage traditional IRA's because they're not accessable.

It had gains of approximately $50,000 this year, and I won't be getting a 1099. If it were in taxable funds I would have to pay significant tax on this gain and it would reduce the amount I can invest significantly.

For me, it is a vital part of my early retirement plan. I plan on withdrawing funds from this account to soak up the lowest tax bracket, and then taking withdrawls from my Roth's for anything more that I'll need. I know there's no free lunch from the tax man, but I'll be in a much better position to pay tax then than I am now.

I agree, they're probably not for everybody. But I'm one of the 4 that said they have one, and would do it again.

 

[brewer12345]

EP, what is the fully loaded expense ratio on this annuity? Which insurance company is it with?

Its not that variable annuities are terrible in and of themselves, but the huge costs easily outweight the benefits in the vast majority of cases.

 

[cute fuzzy bunny]

Well, I guess that only works until you hit age 70. Then all you need to do is Mulitply by 13.3 to get that ultra safe 7.5% withdrawal rate!

Thing is, its not "ultra safe" at all, and thats the part you arent getting or dont want to get.

There is no free lunch, there is no reward without risk, and whenever something looks like a good deal, you either havent seen the whole story or dont understand something.

In this case you've deliberately and vocally discounted a number of potentially unsafe circumstances (or worst-cased away the alternatives) to justify your desire to spend more money.

In your case, you've got enough money to make some errors in judgment and some basic investment flubs and still have things come out okay.

Someone with less financial means might not be so lucky.

Sorry about taking your candy away...

 

[cute fuzzy bunny]

I can't remember anyone ever talking down an employer sponsored pension for life.

But I will! I imagine plenty of people working for the powerhouse companies of the 50's, 60's and 70's that felt their pensions were bulletproof might have a few negative things to say about their pension plans as their companies went into or are teetering on bankruptcy.

The majority of companies in the fortune 500 with DBP's show liabilities in excess of assets and a fair number of them look to have limited means to create offsetting assets without going into bankruptcy.

Several years ago I took out a Variable Annuity

Sounds like you exhausted other options; if its all you've got its something you have to consider. We've got about 50k in my wifes 403b, based on a variable annuity. I hate it, I hate the expenses, I hate the fund options, and I hate the 500+ page contract and its onerous, deceptive language. But putting most of her gross income into it has produced some favorable tax treatment for us the last few years.

That having been said, after reading the latest prospectus and getting some clarification on some of the terminology, and having found out that I had thrown up a little bit into my mouth, we're finally getting rid of the sucker.

You might look into the 'surrender fees' a little harder. In my case I was fairly sure we could pull the money without surrender fees after 8 years. The actual language is vague and excessively wordy, but the real answer is that money thats been IN THE PLAN for 8 years can be withdrawn without fees. So you may find that your more recent deposits are not surrender free.

EP, what is the fully loaded expense ratio on this annuity? Which insurance company is it with?

Thats one of the pissers...they do absolutely everything to avoid giving you a fully loaded number in one place. Some of the more commonly recommended (by the plan administrators) funds, which smell like vanguards 'lifestrategy' series, carry individual expense ratios near or over 1%, some near 2%. Plus a bunch of administration fees, account fees...you could pay 1.5-2.5% without even knowing your account was bleeding to death. But the sheet showing gross raw returns they send you looks great!

We're tucked into the only two funds that have a decent fee, the small cap index and s&p 500 index, and the fully loaded expenses on those are slightly over a half percent.

When she quits that job, we'll roll it over into an IRA, take any surrender hits (hopefully small) and be done with it. I have no intention of annuitizing the amount or contributing further.

But I suppose if we had no other options or investments, we'd have no choice.

It'd be really nice for these education and medical outfits to offer something better than a VA option for retirement...

 

[d]

it has over $400,000 in it, inside a well planned mix of equity funds ...It had gains of approximately $50,000 this year

so the return was <8% !!! about 1/2 what you could have received from Vangard Total Stock Market (a well planned mix of (domestic) equity funds)

 

[cute fuzzy bunny]

Poll consensus update:

Our "open mindedness" is sticking at around 80%.

It occurred to me after talking about variable annuities that since we have a significant one through my wifes employer, that I should have voted "2 and 7", since we have one and I dont like it but I'd consider one with better terms and lower costs in the future.

That would put our still statistically tiny sample size results at exactly 50/50...half of the people who bought an annuity regretted it later. To be fair, it sounds like a fair number of the folks who ended up here had no other choices for a retirement account or bought them when they were young and didnt fully understand the implications.

 

[cute fuzzy bunny]

nm

 

[d]

ROR looks a little higher than 8% to me,

yup ... just realized that and came back to correct ... you're too quick and i'm too slow. ... so the difference is only 20% (12.5% vs. 15.5%) ... nonetheless, not insubstantial.

(and just now i realized that the base might not have been 400k, but instead 350k ... how about we just pretend i didn't comment at all. time for a much needed nap.)

 

[Empty Pockets]

I like this forum. (I'm new around here) who the he!! else would listen to this.

Over lunch hour I rounded up the actual figures from my Variable Annuity. It is with Jackson National Life, here are the allocations:

20% each in these Mellon Cap Funds:

Dow 10
Global 15
Management 25
Small Cap
S&P 10

It automatically rebalances quarterly (nice not to worry about taxes)

Here are the actual numbers from 2006:

Starting balance on 1/2/2006 = $325,401.17

I DCA contributions of $22,670 throughout the year.

Ending balance on 12/31/2006 = $397,344.

I know I should know the actual expense costs, but I don't. I also have a portfolio of taxable mutual funds, and funds inside Roth IRA's. I compare before tax returns on them and most years they're within a % point. Earnings are growing tax deferred too, that's nice when you're in a higher marginal tax bracket.

For what I have in mind with this money, I still think the annuity is a good choice. It is for retirement income. I like the step up in guarantee level every 5 years, I like the ability to invest more aggressively in equities and still have a guaranteed 4% return. And I really like the tax deferred status. I don't like the fact it doesn't get a step up in cost basis to my heirs, but that's not the primary reason I have an annuity, it is for retirement income and I'm going to spend it down over my life expectancy, it will let me leave other investments intact that would be better to inherit, such as appreciated stocks & real estate. I won't have to tap into them in retirement so they can grow and pass on more efficiently.

I'm sure this won't convince anyone who doesn't like annuities, but for me, I'd do it again.

 

[brewer12345]

EP, based on what you have told us, it would not surprise me if your total expense ratio is ~3% annually.

 

[cute fuzzy bunny]

One thing for you to consider in the comparison above is that its been a great friggin year for investing and almost everything went up. A lot. So it all looks good.

You really should get a handle on the expenses. Call your plan administrator (name and # should be on your statements) and ask them to give you the straight up, total expenses and fees by fund and account. You may not get a fully formed direct answer, but you might.

I think what we've learned here is that people are more CAUTIOUS about annuities but would consider the role they might play, rather than not "liking" them. They're nothing more than another investment option with an emotional handle on them.

Something thats always pushed my buttons is people who speak in generalizations or absolutely that may not be so general or absolute.

"Certain", "assured", "guaranteed", "real", "total", "safe"...are largely definable terms with variable acceptance depending on who you're talking to. They sound great in the marketing literature, but YOU need to take the time to determine what it means for YOU.

I think thats where the split occurs here. Some folks see an annuity as ultra safe and guaranteed and in fairness...the issues that would affect the safety or guarantees may not apply to them or be important. Others have a different feeling because there are safety and guarantee issues that they recognize and that apply to them.

 

[Jarhead*]

In this case you've deliberately and vocally discounted a number of potentially unsafe circumstances (or worst-cased away the alternatives) to justify your desire to spend more money.

In your case, you've got enough money to make some errors in judgment and some basic investment flubs and still have things come out okay.

Someone with less financial means might not be so lucky.

Sorry about taking your candy away...

Fuzzy: I by and large don't get involved with speculating what anybody should do with their allotted time on this earth, based on their financial ability, etc. etc. to do so.

"Cutthroat" is a fly-fisherman, and based on that I cut him a lot of slack.

Be that as it may, after reading his almost unlimited amount of posts re: his Lexus, elaborite trips, wine celler, expensive electronic equipment, expensive home, etc. etc., and penchant for telling everyone that will listen to him about his philosophy of making sure that you die broke, a couple of qualifacations are in order.

Cutthroats wife works full-time, supplying him with health ins. and cash flow.

The way that "Cutthroat" and his wife leads their life, quite frankly, is none of my business, and would not be mentioned, but for the fact that he seems to be, for whatever reason, determined to tell everyone that is willing to listen what they should do with their financial life.

As with anything in life, with a little experience, taking advice should be done with a firm grasp of understanding who is giving the advice.

Cutthroat: Sorry, pal, but my tolerance level has reached the top limits.

Love, Jarhead

 

[cute fuzzy bunny]

I think he's less on the end of telling people what to do with their financial life than unintentionally influencing nascent investors by telling them what HE plans to do, perhaps without their factoring in his rather unique circumstances.

What I told him in private is that I am not so much challenging his personal financial matters and opinions as I am trying to broaden the discussion to take all the facts and material emotional considerations into account. And that not many people are like he and I from a financial standpoint. And that a good many people are reading and learning from this stuff, many of which never even register.

He's chosen to take it personally and make a fight out of it. Regrettable, but what the hell, i'm game.

The sad part is that the diatribes often cause you to lose an audience, and any potential for learning. You get two guys with thoroughly urine stained shoes and not much gained.

But it does take up the spare time...

 

[Empty Pockets]

I'll bet they are.

What were the after expense returns for 2006 ? Hard to tell with the DCA contributions throughuot the year, but it looks to me to be around 15%.

The current tax liability was 0%. When I draw these funds, they will be my only source of TAXABLE income, so the marginal rate will be much lower than now when I'm in my peak earning years. I really don't like having to write out a check in April for the 1099's I get on my taxable funds.

I know it was a great year, I've owned this annuity through some very bad years too, and I also know that there are no "guarantee's" in anything. But someone please tell me specifically, what would be safer about holding these funds outside of an annuity ? That's what I'd be doing otherwise.

Myself, I don't have a problem with owning a Variable Annuity, I do have a problem with how some annuities are marketed and overpromised, and I know - they're not for everybody. I've been investing in equities for 20 years and know all too well the risks that come with them.

Glad to see the focus back on annuities.

 

[FinanceDude]

EP, based on what you have told us, it would not surprise me if your total expense ratio is ~3% annually.

Probably is........I know that of the "big guys" out there, Hartford has the LOWEST M&E of 1.15%, plus the subaccount fees........usually around .65-1.00, plus any riders like living benefits of .40-.65.

The returns quoted on historical performance are net of fees, as would be on a Vanguard or Dodge and Cox or whatever............

Vanguard and others have a much lower cost, albeit without living benefit riders or whatever. So I guess it goes back to why it's right for someone or not.............

It seems to me that it's about education. What make ME comfortable is not the same as others, etc. Not everyone can fully embrace ALL the things a number of folks on this board do ..................

Reminds me of a friend of mine that has a HUGE library of self-help books, but never makes any changes ................just keeps buying "books from gurus"...................

 

[cute fuzzy bunny]

But someone please tell me specifically, what would be safer about holding these funds outside of an annuity ? That's what I'd be doing otherwise.

I think you have no better options. An actionable course might be to determine the fund and account expenses and look for ways to reduce them. The two indexes in my wifes VA cost a lot compared to other indexes outside of a VA, but they're way cheaper than the other fund options and WAY cheaper than the default funds the plan provider put her in before I met her.

Perhaps if one or two of the diversifying options is quite expensive, you could fund that in a taxable account while shifting assets within the VA to cheaper fund options. Or slide into indexing options available, cut the expenses and look at the returns long term as being better due to both the lower expenses and indexing...

 

[FinanceDude]

I think you have no better options. An actionable course might be to determine the fund and account expenses and look for ways to reduce them. The two indexes in my wifes VA cost a lot compared to other indexes outside of a VA, but they're way cheaper than the other fund options and WAY cheaper than the default funds the plan provider put her in before I met her.

Perhaps if one or two of the diversifying options is quite expensive, you could fund that in a taxable account while shifting assets within the VA to cheaper fund options. Or slide into indexing options available, cut the expenses and look at the returns long term as being better due to both the lower expenses and indexing...

Pre-tax is still better than after-tax IMO..............tough to make 20-30% guaranteed up front.............

 

[cute fuzzy bunny]

Agree completely, and thats why we've been chucking money into my wifes VA.

I guess I was figuring there may already BE an after tax account (he mentioned a Roth) and the asset allocation could be split with the after tax account holding high fee asset classes while the pretax VA account contains low-fee core stock and bond indexes...if they're even available in the VA fund choices.

 

[brewer12345]

I know it was a great year, I've owned this annuity through some very bad years too, and I also know that there are no "guarantee's" in anything. But someone please tell me specifically, what would be safer about holding these funds outside of an annuity ? That's what I'd be doing otherwise.

Myself, I don't have a problem with owning a Variable Annuity, I do have a problem with how some annuities are marketed and overpromised, and I know - they're not for everybody. I've been investing in equities for 20 years and know all too well the risks that come with them.

Glad to see the focus back on annuities.

Here is the problem I have with annuities:

- Give me 2.5% of your account balance every year and I will guarantee that over 10+ years (subject to many restrictions) you won't lose money.

This guarantee has almost zero value.